There is growing pressure on the government from plenty of stakeholders to regulate umbrella companies to help protect temporary workers and stop tax avoidance schemes. This blog will look at why people are calling for the regulation of umbrella companies.
Mini umbrella company fraud (MUC)
Mini umbrella company fraud isn’t new – the government has known about MUC fraud for years. However, it was recently unveiled in a BBC investigation that mini umbrella companies were paying Covid vaccination workers on the back of non-compliant referrals by recruitment consultants. This is profoundly worrying because the worker in question had no idea who the company had issued their payslip.
Costing the government millions in unpaid taxes
There have been many claims from high-profile stakeholders about the damage being caused to the UK’s economy due to non-compliant umbrella companies.
Director of policy at IPSE (The Association of Independent Professionals and the Self Employed), Andy Chamberlain, said regulating the umbrella sector is “long overdue” and the latest news about mini umbrella companies is the “tip of the iceberg”.
Tax QC and founder of the Good Law Project Jo Maugham explained the impact mini umbrella companies have on the UK’s economy. In the BBC’s article, he commented:
“It’s not as though this is some tiny piece of tax avoidance – you know, where your local minicab firm isn’t declaring all of the fares that it receives. This is industrial scale tax abuse.
I mean it’s really absolutely extraordinary, hundreds of millions of pounds if not billions of pounds is likely to have been lost due to HMRC’s apparent disinclination to tackle this abuse.”
It’s worth adding that it’s not just the government that loses out financially due to umbrella company malpractice. It’s recently been suggested that some umbrella companies are illegally retaining the holiday pay of their employees. This has further added to the demand for the sector to be regulated.
Are there any regulations in the umbrella company industry at the moment?
Presently, the government doesn’t regulate the umbrella company sector. However, a recent report by the Low Incomes Tax Reform Group (LITRG) found two self-regulating bodies in the industry – the Freelancer and Contractor Services Association (FCSA) and Professional Passport.
Both bodies have strict compliance standards their members must adhere to. However, only a fraction of umbrella companies in the UK have accreditation from the FCSA or Professional Passport. Therefore, a vast number of umbrella companies are effectively operating on their own accord and without regulation. Many of these may be perfectly compliant but without a well-respected professional accreditation – who can be sure?
In the report, the LITRG say the following about the current self-regulation of the umbrella company sector:
“Commenting on the technical aspects of the different bodies’ compliance standards is outside the scope of this report and we are unable to test how rigourous their processes are.
Our research indicates that both bodies have good intentions in respect of regulating the umbrella company market and that their offerings are far more than just a tick box exercise. However, there are inevitably limitations in their approach.”
Amendments to the Finance Bill will not be put to vote amongst MPs – a decision that has not been well received. However, Julia Kermode, founder of iWork, said to Contractor UK – “all is certainly not lost”.
“Given that the amendments effectively criticise the government’s lack of action [on umbrella company regulation], the fact that they were properly debated is an achievement.
So it certainly does increase the pressure for some real action to be taken… and don’t forget – the government has already committed to regulate the umbrella sector.”
As things stand, it looks like government intervention into the umbrella company sector is not happening any time soon. Our advice to contractors looking at umbrella companies is to use FCSA or Professional Passport accredited providers only and carry out due diligence. While some umbrellas are acting unethically and in complete disregard of their employees’ welfare, a majority operate PAYE and will ensure you’re paid compliantly.